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Shareholder and director disputes
At the outset of a new business venture the risk of a dispute may seem far fetched. However, the practical reality that we often see is that disputes in one form or another frequently arise over time for example due to differences of opinion. These differences can easily result in complete deadlock in decision making.
The prevailing desire for ultimate control over a prospering enterprise frequently results in oppressive conduct against minority shareholders for example by way of dilution of shares, exclusion from management, and so forth. These risks are elevated in the case of smaller “quasi-partnership” businesses with 50/50 shareholders and directors. Directors may find themselves in a position of conflict between their fiduciary duties on the one hand to the company, and duty of care to shareholders, and their personal interests. This may also result in causes of action or claims becoming available for the company against those directors who have breached their duties. Where there is a trust involved, beneficiaries may also claim that directors have been involved in a breach of trust, or the directors may be liable to the corporate trustee arising from their conduct contrary to the corporate trustee’s obligations as trustee for the relevant trust.
The risk of expensive and protracted litigation is rife, despite the fact that it can frequently be avoided.
Shareholder agreements
You will find that the importance of a carefully crafted shareholder’s agreement cannot be emphasised more by any corporate lawyer. It frequently avoids the vast expense, stress and wasted opportunities that arise from and accompany bitterly fought disputes between shareholders / directors / beneficiaries. Shareholder agreements do so by making provision for various scenarios and circumstances which would otherwise be inadequately specified in the company’s constitution or under the Corporations Act 2001 (Cth). Key issues typically covered include:
- More clarity on decision making of the business, reporting, and tailored voting rights
- Procedures and requirements for the payment of dividends
- Clearer obligations and responsibilities of each key personnel
- The direction and strategy for the business
- Share options and vesting of shares over time
- Procedures in the event of breaches or disputes
- Ultimately, mechanisms designed to prevent disputes but also providing for the sale / purchase of shares in various common scenarios, and dispute resolution procedures which can avoid substantial costs of litigation. In the absence of provision in this regard, the parties will be left to try to negotiate on a solution. Frequently, there are disputes over the terms e.g. the sale price of the shares, who the seller or buyer will be, etc. In the absence of agreement, the parties will need to consider administration or otherwise seek relief from the Court.
Winding up on just and equitable grounds; a remedy of last resort
Common actions include:
- Proceedings for oppressive conduct under the Corporations Act 2001 (Cth) where the applicant can show that the conduct of a company’s affairs or an actual or proposed act or omission by or on behalf of a company or a resolution, or a proposed resolution, of members or a class of members of a company is either:
- contrary to the interests of the members as a whole; or
- oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
- Proceedings alleging breaches of director’s statutory and common law duties or obligations under the constitution.
- Statutory derivative actions on behalf of the company against officers e.g. to recover money misappropriated and/or to liquidate the company if necessary.
- Proceedings seeking a broad range of other remedies including for the purchase of shares by any person, the appointment of a receiver, an injunction preventing the doing of an act, or an order for the company to be wound up on “just and equitable” grounds.
In Re SP Private Holdings Pty Ltd [2021] VSC 142 (23 March 2021) the Victorian Supreme Court were fairly robust in the management of the timetable. Briefly, a 50% shareholder and director in a group of companies sought relief from oppression alleged to have been caused by the other 50% shareholder and director. The application was amended less than one month before judgement to seek the appointment of a provisional liquidator, relying on the just and equitable ground for winding up.
In short, there was evidence of an extremely dysfunctional relationship between the parties, a bitter dispute, clear deadlock, and deep acrimony. Whilst the Court will be reluctant to wind up a solvent company (this being a rather drastic and last resort measure), there was no impediment to a just and equitable winding up in the circumstances. There was clear deadlock, deep acrimony, thereby rendering the continuation of the enterprise futile. There was no utility in a provisional liquidator being appointed and a winding up was ordered efficiently and in keeping with the overriding objective of the Court to facilitate the just, quick and cheap resolution of the real issues.
Contact our corporate lawyers for assistance in relation to the above. Our commercial lawyers, business lawyers, and disputes lawyers provide expertise in corporate and commercial advisory services as well as litigation and dispute resolution, and specifically shareholder disputes.
HEATHFIELD GROSVENOR
Level 21, 133 Castlereagh Street
Sydney NSW 2000
Australia
T: +61 2 8005 7388
E: contact@hglaw.com.au
The information provided in this article is provided by way of general information only. It does not constitute legal advice, and should not be relied upon as such. Specific independent legal advice should be obtained before deciding to act, or not to act, upon the views expressed or information contained in this article.
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